Copyright (c) 1995 Tax Analysts Tax Notes Today AUGUST 31, 1995 THURSDAY DEPARTMENT: Other Court Documents (CTO) CITE: 95 TNT 171-37 LENGTH: 7094 words HEADLINE: 95 TNT 171-37 PLAINTIFF TAX ANALYSTS' OPPOSITION TO DEFENDANT IRS's MOTION FOR SUMMARY JUDGMENT. (Tax Analysts v. IRS) (94-CV-0220) (United States District Court for the District of Dist. of Columbia) (Section 6104 -- Exempt Organization Information) (Release Date: July 28, 1995) (Doc 95-7557) CODE: Section 6104 -- Exempt Organization Information SUMMARY: Plaintiff filed its opposition to defendant IRS's motion for summary judgment in the case of Tax Analysts v. Internal Revenue Service, a suit seeking release of all exempt organization closing agreements entered into by the IRS after Dec. 31, 1992. AUTHOR: Hogan, Thomas GEOGRAPHIC: United States INDEX: exempt organizations, disclosure REFERENCES: Subject Area: Exempt Organizations TEXT: TAX ANALYSTS, Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant. Release Date: July 28, 1995 PLAINTIFF TAX ANALYSTS' OPPOSITION TO DEFENDANT INTERNAL REVENUE SERVICE'S MOTION FOR SUMMARY JUDGMENT William J. Lehrfeld D.C. Bar No. 51292 Bruce L. Stern D.C. Bar No. 436231 WILLIAM J. LEHRFELD, P.C. PAGE 31 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 1250 H Street, N.W., Suite 740 Washington, D.C. 20005 Telephone: (202) 659-4772 Facsimile: (202) 659-8876 William A. Dobrovir D.C. Bar No. 030148 William A. Dobrovir, P.C. 65 Culpeper street Warrenton, Virginia 22186 Telephone: (703) 341-2183 Facsimile: (703) 341-4329 Attorneys for plaintiff TAX ANALYSTS TABLE OF CONTENTS Table of Contents Table of Authorities I. Introduction II. Summary statement of Facts A. The Underlying FOIA Request B. The Closing Agreements at Issue III. The Requested Closing Agreements are not Exempt From Disclosure Under IRC 6103 A. Under IRC 6104, "Return Information" Relating to Exempt Organizations is Subject to Public Disclosure B. IRC 6104 provides an Exception to IRC 6103's Non-Disclosure Provisions IV. The Requested Closing Agreements are Subject to Public Disclosure Under IRC 6104 A. The Closing Agreements are "Documents Issued by the IRS With Respect to" Approved Applications for Recognition of Exemption 1. The Closing Agreements are "Issued" by the IRS a. A Closing Agreement is Mailed by the IRS to the Taxpayer to Which it Pertains 2. The Closing Agreements are Issued With Respect to Approved Exemption Applications V. The Fact That the Closing Agreements Contain "Return Information" does not Preclude Their Disclosure Under IRC 6104 VI. The Courts' Decisions in Breuhaus and Belisle do not Support the IRS' Decision to Withhold the Requested Closing Agreements VII. The IRS' Refusal to Produce the Closing Agreements Contravenes the Exempt Organizations Technical Division's Disclosure Policy VIII. Conclusion Certificate of Service TABLE OF AUTHORITIES CASES Belisle v. Commissioner, 462 F. Supp. 460 (W.D. Okla. 1978) Bob Jones University v. United States, 461 U.S. 574, 103 S. Ct. 2017, 76 L. Ed. 2d. 157 (1983) Breuhaus v. IRS, 609 F. 2d 80 (2d Cir. 1979) Church Universal Triumphant v. United States, 75 AFTR 2d paragraph 95-612 (D.D.C. 1995) United States v. Posner, 594 F. Supp. 930 (S.D. Fla. 1984) CONGRESSIONAL REPORTS Report on Reforms to Improve the Tax Rules Governing Public Charities, Subcommittee on Oversight of the Committee on Ways PAGE 32 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 and Means, U.S. House of Representatives, WMCP 103-26 (May 5, 1994) S. Rpt. 91-552 (on Tax Reform Act of 1969), 91st Cong., 1st Sess. (1969) S. Rpt. 1983 (on Technical Amendments Act of 1958), 85th Cong. 2nd Sess. (1958) S. Rpt. 2375 (on Revenue Act of 1950), 81st Cong., 1st Sess. (1950) H. Rep. No. 94-658, 94th Cong., 1st Sess. (1975) ARTICLES Rogovin, "Tax Exemption: Current Thinking Within the Service," 22nd Annual N.Y.U. Institute (1964) Rose, "The Rulings Program of the Internal Revenue Service." 35 Taxes 907 (1957) STATUTES 26 U.S.C. 6103(a) 26 U.S.C. 6103(b)(1) 26 U.S.C. 6103(b)(2)(A) 26 U.S.C. 6104(a)(1)(A) 26 U.S.C. 6104(e)(1) INTERNAL REVENUE CODE REGULATIONS Reg. section 301.6104(a)(1)(b) Reg. section 301.6110-2(h) INTERNAL REVENUE MANUAL (IRM) IRM -- Administration, Disclosure of Official Information Return Handbook, Chapter 910(7) IRM -- Administration, Part VIII, EP/EO, 7764.3(3) IRM -- Audit (10)46(4) IRM -- Exempt Organizations Handbook, Chapter (49)23(2) MISCELLANEOUS Bittker & Lokken, Federal Taxation of Income, Estates and Gifts, 2nd. Ed. (1992) I. INTRODUCTION At issue in this case is whether certain closing agreements entered into between defendant INTERNAL REVENUE SERVICE and exempt organizations which relate to, or contain provisions regarding, the Service's determination to recognize the organizations as exempt from tax (or to re-establish their exempt status following revocation) are subject to public disclosure under the U.S. Freedom of Information Act ("FOIA"). In its Motion for Summary Judgment, the IRS asserts that these closing agreements are not subject to disclosure and, as such, summary judgment should be entered in its favor on plaintiff's FOIA claim. The IRS' assertion that the closing agreements sought by plaintiff are not subject to public disclosure is premised on its contention that the documents do not fall within the ambit of Internal Revenue Code section ("IRC") 6104, which provides, in relevant part, that any document "issued" by the Service with respect to its determination to recognize an organization as exempt from tax must be made available by the IRS for public inspection. The Service argues that the closing agreements at issue in this case are not "issued" by it and, as such, need not be produced to plaintiff. However, as discussed below, and in plaintiff's Motion for Summary Judgment and supporting papers filed with the Court on June 30, 1995, the IRS' PAGE 33 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 contention that the requested closing agreements are exempt from disclosure under FOIA has no merit. Notwithstanding the Service's assertion to the contrary, these closing agreements ARE subject to public disclosure under IRC 6104 since: 1) pursuant to IRS Reg. section 301.6110-2(h), the agreements are "issued" by the Service since they are mailed to the organizations to which they pertain; and, 2) they arise out of and relate to the IRS' determination to recognize an organization as exempt from tax under IRC 501(a) (or re-establish its exemption following revocation). Because the contested agreements are inherent components of the exemption application process and are thus subject to disclosure under IRC 6104, the IRS is not entitled to judgment on plaintiff's FOIA claim as a matter of law. II. SUMMARY STATEMENT OF FACTS /1/ A. THE UNDERLYING FOIA REQUEST On November 10, 1993, plaintiff filed a Freedom of Information Act ("FOIA") disclosure request with defendant IRS which is the subject of this suit. By its FOIA request, TAX ANALYSTS sought, in part, copies of all closing agreements the IRS entered into with exempt organizations on or after December 31, 1992. Plaintiff's FOIA request complied with all applicable IRS regulations. The IRS failed to timely respond to plaintiff's FOIA request and, on January 10, 1994, TAX ANALYSTS filed an administrative appeal of the Service's constructive denial of its November 10, 1993 disclosure request. On February 7, 1994, the IRS denied plaintiffs' administrative appeal and advised TAX ANALYSTS that it would not produce any closing agreements sought by its FOIA request. The IRS' decision was based upon its determination that closing agreements constitute privileged "return information" and, as such, pursuant to IRC 6103 and 5 U.S.C. 552(b)(3), are not subject to disclosure under FOIA. On October 14, 1994, plaintiff filed its complaint herein. By its complaint, TAX ANALYSTS is seeking an order directing the IRS to produce a sub-set of the closing agreements requested by its November 10, 1993 FOIA request. Specifically, plaintiff is seeking the production of any closing agreement entered into between the IRS and an exempt organization which relates to, or contains provisions regarding, the organization's proposed or pending application for recognition of exemption and/or the IRS' initial determination to recognize the organization as exempt under IRC 501(a). B. THE CLOSING AGREEMENTS AT ISSUE Plaintiff is aware of limited facts regarding two of the closing agreements at issue herein. They involve organizations whose tax- exempt status was revoked (after prior approval) or denied during the application process. The first agreement was executed in 1993 between the IRS and the Old Time Gospel Hour ("OTGH"). This agreement was entered into after the Service revoked OTGH's exempt status for engaging in improper political activities. Following the revocation, OTGH re-applied for tax exempt status for future years (years after 1987), conceding revocation for prior years. The IRS and OTGH resolved potential conflicts regarding OTGH's future exempt status through the use of a closing agreement. This agreement specifically PAGE 34 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 provided that one of the conditions of reinstatement of OTGH's exempt status was the organization's agreement to pay the IRS $ 50,000 in tax for its revoked years and to change its organizational structure. /2/ Although this agreement apparently contains provisions relating to OTGH's future corporate behavior and the IRS' recognition of exempt status, the Service has refused to make the closing agreement available for public inspection pursuant to IRC 6104. The second closing agreement plaintiff is aware of involves the IRS' 1993 determination to recognize the Church of Scientology and 24 of its affiliates as exempt from tax. Although it is undisputed that the closing agreement contains provisions directly relating to the IRS' determination to approve the Scientologists' exemption applications and recognize the Church and its affiliates as exempt for future years, /3/ the Service has also refused to make this agreement available for public inspection as required by IRC 6104. III. THE REQUESTED CLOSING AGREEMENTS ARE NOT EXEMPT FROM DISCLOSURE UNDER IRC 6103 Tax "returns" and "return information" are generally not subject to public disclosure. IRC 6103(a) provides in pertinent part: "Returns and return information shall be kept confidential, and except as authorized by this title . . . no officer or employee of the United States . . . shall disclose any return or return information obtained by him in any manner in connection with his service . . ." (26 U.S.C. 6l03(a).) /4/ In its Memorandum of Points and Authorities filed in support of its Motion ("Brief"), the IRS argues that the closing agreements sought by plaintiff constitute "return information" and are exempt from disclosure pursuant to IRC 6103. The IRS argues, in pertinent part: "Each of the agreements at issue contains the taxpayer's identity, identifies whether the taxpayer's return was subject to examination or other investigation, and contains all or some of the following information: the nature, source and/or amount of the organization's income, payments, receipts, assets and tax liabilities . . . Accordingly, there can be no doubt that these documents contain return information as that term is defined in PAGE 35 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 Section 6103(b)(2) of the Internal Revenue Code." (Brief, p. 14.) However, in arguing that the agreements are not subject to public disclosure under IRC 6103, the IRS ignores the fact that the definition of "return information" set forth in IRC 6103(b)(2) has limited applicability to tax-exempt organizations. Unlike non-exempt taxpayers, a great deal of "return information" relating to exempt organizations is demanded by the IRS during the application process so it is neither confidential nor exempt from disclosure. Forty years ago, the IRS Chief Counsel articulated why: "Applications for tax exemption pour in at the rate of about 800 a month, and they raise the most sensitive, explosive, baffling questions -- which are more than mere tax questions." Nelson P. Rose, "The Rulings Program of the Internal Revenue Service", 35 Taxes 907, 908 (1957). A. UNDER IRC 6104, "RETURN INFORMATION" RELATING TO EXEMPT ORGANIZATIONS IS SUBJECT TO PUBLIC DISCLOSURE Because their operations are subsidized by taxpayers, Congress mandates that a substantial amount of information relating to exempt organizations be available for public inspection. /5/ Under IRC 6104, if an organization is recognized as exempt from tax under IRC 501(c), its exemption application, and all documents filed in support thereof and issued by the IRS with respect thereto, must be made available for public review by the IRS and by the charity itself, as must be the organization's annual information return (IRS Form 990). /6/ The plain purpose of IRC 6104 is to facilitate public oversight of exempt organizations and to aid the IRS in the monitoring of their activities. /7/ As Congress reported last year, public oversight is "critical to ensuring charities' overall compliance with the tax laws, and to maintaining the continued high level of public trust in the charitable community." Report on Reforms to Improve the Tax Rules Governing Public Charities, Subcommittee on Oversight of the Committee on Ways and Means, U.S. House of Representatives, WMCP 103- 26 (1994), p. 19. /8/ Public review of the documents passing between the Service and a successful exemption applicant also ensures integrity in the IRS' system of granting exempt status and provides a safeguard that organizations will not be accorded special treatment by the Service. Greater public awareness of IRS exemption rules means that bad rulings based on faulty policy can be challenged and thereafter, the IRS may be forced by public opinion to change its policy. Bob Jones University v. United States, 461 U.S. 574, 585 (fn. 9) (1983). The unsavory history of the government's favorable IRC 501(c)(3) treatment of segregated private schools, and then its complete reversal, indicates the benefits of full disclosure of IRS exemption rulings. B. IRC 6104 PROVIDES AN EXCEPTION TO IRC 6103's NON-DISCLOSURE PROVISIONS PAGE 36 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 IRC 6104 provides an exception to the non-disclosure provisions of IRC 6103. The Internal Revenue Manual provides, in relevant part: "IRC 6104 excerpts much Exempt Organization tax information from the general confidentiality rule of IRC 6103." (IRM, Exempt Organizations Handbook, Chapter (49)23(2).) Because of IRC 6104, the applicability of IRC 6103 to tax-exempt entities is severely limited. As a result of Congress' desire to have charitable organizations be subject to public oversight and scrutiny, the following "return information" (as defined by IRC 6103(b)(2)(A)) relating to an exempt organization is subject to public disclosure and is NOT privileged: 1. The "identity" of the taxpayer (including its name, address and employer identification number); 2. The "nature, source and amount of [its] income"; 3. The taxpayer's "assets, liabilities, and net worth", and, 4. The taxpayer's expenditures (including compensation paid to its highest paid officers, employees and independent contractors). /9/ Because of IRC 6104, the only "return information" which may not be subject to public disclosure is information with respect to whether the organization is liable for any tax, penalty, interest or fine or whether it is, or will be, under examination by the Service. (See, Breuhaus v. IRS, 609 F. 2d 80 (2d Cir. 1979) (IRS correspondence relating to organization's liability for IRC 507 termination tax not subject to public disclosure); Belisle v. Commissioner, 462 F. Supp. 460 (W.D. Okla. 1978) (IRS' investigative files relating to organization's liability for tax not subject to public disclosure).) Nonetheless, this information may be specifically disclosed on an annual information return (IRS Form 990) along with financial data which would otherwise be confidential. Certainly, if Congress mandates disclosure of financial information on an annual return and the papers associated with the exemption application (or re-application) process, the confidentiality rule of IRC 6103 should not bar disclosure because that same information appears in a different form at a different time in IRS records. The government may not exalt form over substance to subvert a cornerstone of sound tax policy. See, Bittker and Lokken, Federal Taxation of Income, Estates and Gifts, 2nd. Ed., Chapter 4.3.3, "Form v. Substance" (1992). /10/ IV. THE REQUESTED CLOSING AGREEMENTS ARE SUBJECT TO PUBLIC DISCLOSURE UNDER IRC 6104 The critical issue for determination in this case is whether the requested closing agreements are subject to public disclosure under IRC 6104. The crux of the parties' dispute is whether the agreements were "issued" by the IRS with respect to exemption applications approved by the Service. In its Brief, the IRS contends that they were not. As discussed below, this assertion is without merit. A. THE CLOSING AGREEMENTS ARE "DOCUMENTS ISSUED BY THE IRS WITH RESPECT TO" APPROVED APPLICATIONS FOR RECOGNITION OF EXEMPTION PAGE 37 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 IRC 6104(a)(1)(A) provides that "any document issued by the IRS with respect to ["the exemption application filed by an organization with respect to which the Secretary made his determination that such organization was entitled to exemption under Section 501(a)"]", must be made available by the IRS for public inspection. A two-prong analysis may be used to determine whether a document is subject to public inspection under this provision. Under this test, it must first be determined whether the document is "issued" by the IRS. If it is, it must then be determined whether the document was issued "with respect to" an exemption application approved by the IRS. Under the plain language of IRC 6104, a document which meets both these criteria is subject to public disclosure. As discussed below, the requested closing agreements satisfy both prongs of this test and, as such, must be made available for plaintiff's inspection and review. 1. THE CLOSING AGREEMENTS ARE "ISSUED" BY THE IRS The first prong of the disclosure analysis is whether the agreements are "issued" by the Service. Under the IRS' own regulations, it is clear that they are. Reg. section 301.6104(a)(1)(b) provides that, for purposes of IRC 6104, the term "issued" is to be interpreted in accordance with the rules set forth in Reg. section 301.6110-2(h). (IRC 6110 relates to the public disclosure of written determinations and technical advice memoranda). Reg. section 301.6110-2(h) provides in pertinent part: "'Issuance' of a written determination occurs, . . ., upon the mailing of the ruling or determination letter to the person whom it pertains. Issuance of a technical advice memorandum occurs upon the adoption of the technical advice memorandum by the district director." As such, for purposes of IRC 6104, a document is "issued" by the IRS when it is either mailed to the taxpayer to which it pertains or is adopted by the Service. a. A CLOSING AGREEMENT IS MAILED BY THE IRS TO THE TAXPAYER TO WHICH IT PERTAINS Under the IRS' internal procedures, an exempt organization which enters into a closing agreement with the IRS will prepare the agreement, sign it and send it to the IRS for execution by the Assistant Commissioner (EP/EO). Once a closing agreement is signed by the Assistant Commissioner (EP/EO) (in triplicate), a duplicate original is MAILED by the Service to the taxpayer which is party to the agreement. The IRS' Exempt Organization Handbook provides in pertinent part: "After signing, the closing agreement is returned with the Special File to the Division office. The letter transmitting the PAGE 38 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 duplicate closing agreement to the taxpayer . . . are signed, dated and mailed." Internal Revenue Manual ("IRM") -- Administration, Part VIII, EP/EO, 7764.3(3). (See also, Exhibit 7760-4, copy of transmittal letter to taxpayer.) /11/ The IRS' Closing Agreement Handbook further provides: "A duplicate original of the closing agreement will be mailed to the taxpayer (or to the representative) by appropriate transmittal letter. (See, Exhibit 6 ["Letter Sending Taxpayer Copy of Closing Agreement -- Letter 1595(P)"].)" IRM, Closing Agreement Handbook, Part VIII, Appeals 613.4(3). (See also, IRM -- Audit (10)46(4).) Since closing agreements relating to an organization's exemption application are mailed to the taxpayer, it is clear that pursuant to the rules set forth in Reg. section 301.6110-2(h) they are "issued" by the IRS and, thus, subject to public disclosure under IRC 6104. /12/ 2. THE CLOSING AGREEMENTS ARE ISSUED WITH RESPECT TO APPROVED EXEMPTION APPLICATIONS The second prong of the disclosure analysis is whether any of the agreements relate to an exemption application approved by the IRS. As discussed below, it is clear that at least some of the agreements identified by the IRS meet this criteria. In its Brief, the IRS does not deny that certain of the agreements at issue herein relate to, or contain provisions regarding, its determination to rule favorably upon an exemption application. The IRS only asserts that the agreements do not relate "exclusively" to such a determination. (Brief, p. 7) /13/ Notwithstanding this partial admission, the undisputed facts of this case show that the IRS has: 1) used closing agreements to resolve outstanding issues regarding an organization's application for recognition of exemption; 2) predicated its recognition of exempt status on at least one applicant's agreement to be bound by the terms of a closing agreement; and, 3) agreed in a closing agreement to recognize an organization as tax-exempt. (See, Plaintiff's Statement of Undisputed Material Facts in Support of Motion for Summary Judgment, filed June 30, 1995, Material Fact Nos. 15, 16.) Since it is clear that the requested closing agreements directly relate to, or contain provisions regarding, the IRS' determination to rule favorably upon pending exemption applications and were issued by the Service with respect thereto, the second prong of the disclosure analysis is satisfied. Since both parts of the disclosure test are met, the closing agreements are subject to public disclosure under IRC 6104. PAGE 39 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 V. THE FACT THAT THE CLOSING AGREEMENTS CONTAIN "RETURN INFORMATION" DOES NOT PRECLUDE THEIR DISCLOSURE UNDER IRC 6104 In its Brief, the IRS implies that although the closing agreements at issue herein may have been issued with respect to an approved exemption application, they are nonetheless not subject to disclosure under IRC 6104 since they contain "return information" (i.e., information whether the organization was under examination or was liable for any tax). The IRS argues that the presence of any "return information" in a document removes the entire document from the scope of IRC 6104. This unprecedented contention, however, has no merit. First, such a rule, which is not supported by the plain language of either IRC 6103 or 6104, would undermine the purpose and intent of IRC 6104. Under such a standard, IRS would be able to withhold any document it did not want to disclose to the public by claiming it contained return information or by purposefully including such information in the document. Public accountability and oversight would be thwarted and subject to the discretion of IRS. Second, ANY information submitted to the IRS during the exemption application process becomes subject to public disclosure and any privileged information submitted loses its classification as "return information". IRC 6104 clearly states that "any" paper submitted to the IRS in support of an exemption application and any paper "issued" by the IRS with respect thereto, must be available for public inspection, regardless of the material's content or subject matter. /14/ In Church Universal Triumphant v. United States, 75 AFTR 2d paragraph 95-612 (D.D.C. February 8, 1995), the Court denied a Motion for Temporary Restraining order filed by the Church Universal Triumphant, an organization exempt from tax under IRC 501(c)(3). By its motion, the Church sought to block the IRS from publicly disclosing materials it had produced during discovery in previous litigation with the government relating to the revocation of its exempt status. (For details, see, complaint in Church Universal Triumphant v. United States, Docket No. 92-2839 (USDC D.D.C. 1992) (Oberdorfer, J.).) In support of its motion, the Church argued that the materials to be disclosed by the United States contained "return information". The Court denied the Church's motion. In its decision, the Court noted that the material had been produced during discovery in civil litigation (a public proceeding) and that the Church had not sought a protective order at the time it produced the material to the government. (See, Id., at fn. 3.) Implicit in the Court's decision is the fact that once return information is made public (i.e., submitted in a public proceeding), it loses its privileged nature. c.f., United States v. Posner, 594 F. Supp. 930, 936 (S.D. Fla. 1984) (Once information is in the public domain, even federal tax return information, the entitlement to privacy is lost). Third, the fact that the IRS might use closing agreements to protect otherwise public information from disclosure was a specific concern of Congress when it adopted IRC 6110 in 1975. In a report urging the adoption of IRC 6110, the House Ways and Means Committee stated that although closing agreements PAGE 40 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 were not generally to be subject to public disclosure under that statute as "written determinations", the Service was not to use such agreements to withhold otherwise public information. The Committee report stated: "Your committee intends, however, that the closing agreement exception is not to be used as a means of avoiding public disclosure of determinations which, under present practice, would be issued in a form which would be open to public inspection under the bill." (H. Rep. No. 94-658, 94th Cong., 1st. Sess. (1975), p. 316.) Similarly, the Court should not allow the IRS to avoid the disclosure of IRC 6104 information by using an allegedly confidential closing agreement during the exemption application process. If the entirety of the document flow in the application process (including closing agreements) is not subject to public inspection, the Service, through the use of closing agreements, will be able to mask controversial decisions, and thereby frustrate the Congressional expectation of accountability. Confidentiality of such documents would also serve to protect the agency's actions from the light of public scrutiny, which enhances the likelihood of abuse of process. VI. THE COURTS' DECISIONS IN BREUHAUS AND BELISLE DO NOT SUPPORT THE IRS' DECISION TO WITHHOLD THE REQUESTED CLOSING AGREEMENTS In its Brief, the IRS argues that the Court's decisions in Breuhaus, supra, and Belisle, supra, support its contention that the requested closing agreements were not "issued" by it and are not subject to public disclosure under IRC 6104. This assertion has no merit. In Breuhaus, the issue before the Court was whether a letter sent by the IRS to the Chairman of the House Ways and Means Committee regarding its determination that an exempt organization was not a private foundation and therefore not subject to a termination tax under IRC 507 was subject to public disclosure under IRC 6104. The Court held that the letter, which did not relate to the exemption application process in any way, did not fall within the scope of IRC 6104. The Court stated: "Appellant argues that section 6104(a)(1)(A) requires disclosure not only of documents pertaining to a 'determination that such organization was entitled to exemption under section 501(a)' but also of documents relating to whether an organization granted PAGE 41 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 exemption under section 501(a) is exempt from payment of a termination tax under section 507 of the Code. We disagree. In our view section 6104(a)(1)(A) applies only to documents dealing with whether the organization is to be granted a tax exempt status and not whether it must pay a termination tax, which is a different matter." (44 AFTR 2d at 79-6033.) /15/ In Belisle,, the Court held that the results of an IRS investigation into whether a tax-exempt organization committed a violation of IRC 501(c)(3) were not subject to public disclosure under IRC 6104(a)(1)(A). In its decision, the Court stated that, IRC 6104 "does not encompass IRS investigation files related to" IRC 501(c)(3) organizations. (42 AFTR 2d at 78-5060.) Notwithstanding the Service's assertion to the contrary, neither of these cases supports its contention that the requested closing agreements were not "issued" by it and are not subject to public disclosure under IRC 6104. VII. THE IRS' REFUSAL TO PRODUCE THE CLOSING AGREEMENTS CONTRAVENES THE EXEMPT ORGANIZATIONS TECHNICAL DIVISION'S DISCLOSURE POLICY It is the policy of the IRS Exempt Organizations Technical Division (EOTD) that any closing agreement the Service enters into with an exempt organization regarding a pending exemption application is subject to public disclosure under IRC 6104. During his deposition, Marcus Owens, the Director of the IRS National Office EOTD stated: Q [By Mr. Stern]: In those situations in which the IRS has used a closing agreement in the exemption application process, isn't the agreement placed in the organization's [non-public] administrative file? A [By Mr. Owens]: With regard to those cases with which I am familiar that involved applications for exemption and closing agreements, I believe that is the case, that they were made -- the closing agreements were included in the [non-public] administrative file, AND INDEED, THE [PUBLIC] ADMINISTRATIVE RECORD IN THE CASES. Q: So, copies of the closing agreements were contained in the administrative record [subject to public disclosure]? A: That is what I understand to be the case, and that is, as I recall, a decision that I made in the cases that I asked it to be done. Q: Would that be Division policy? PAGE 42 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 A: THAT WOULD MAKE IT DIVISION POLICY, YES. (Deposition of Marcus Owens, pp. 120 - 121, 11. 24 - 17.) (Emphasis added.) Despite this policy, the IRS has refused to produce copies of the requested closing agreements to plaintiff. The Service's failure to produce the requested agreements is in contravention of the EOTD's policy and apparently reflects a policy dispute between the EOTD and the IRS' Office of Disclosure Litigation. In determining whether the requested closing agreements are subject to public disclosure, the Court should give deference to the policy of the EOTD which has primary responsibility for exempt organization matters in the IRS and, as such, is better suited to determine which exempt organization documents are subject to disclosure under IRC 6104. Public disclosure of closing agreements with exempt organizations serves to alert all exempt organizations of transactions being scrutinized by the IRS and specific activities the IRS considers to be in violation of IRC 501(c)(3). Notwithstanding the public benefit which results from the disclosure of exempt organization closing agreements, the IRS has not adopted any standards as to when it will require an organization to consent to disclosure of a closing agreement or the terms thereof. The result is an inconsistent disclosure policy that defeats the Congressionally mandated rule that organizations enjoying tax exemption should operate in a fish bowl and that the grounds for granting tax exemption should be publicly disclosed. VIII. CONCLUSION Based upon the foregoing, plaintiff TAX ANALYSTS respectfully requests that the Court enter an order denying the INTERNAL REVENUE SERVICE's Motion for Summary Judgment. The IRS is not entitled to judgment on plaintiff's claim as a matter of law. Plaintiff's Motion for Summary Judgment, filed June 30, 1995, is fully supported by the facts and law and should be granted. Respectfully submitted, July 28, 1995 William J. Lehrfeld D.C. Bar No. 51292 Bruce L. Stern D.C. Bar No. 436231 WILLIAM J. LEHRFELD, P.C. 1250 H Street, N.W., Suite 740 Washington, D.C. 20005 Telephone: (202) 659-4772 Facsimile: (202) 659-8876 William A. Dobrovir D.C. Bar No. 030148 William A. Dobrovir, P.C. 65 Culpeper Street Warrenton, Virginia 22186 Telephone: (703) 341-2183 Facsimile: (703) 341-4329 Attorneys for Plaintiff PAGE 43 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 TAX ANALYSTS CERTIFICATE OF SERVICE On July 28, 1995, I served the foregoing document on defendant INTERNAL REVENUE SERVICE by mailing a true and correct copy thereof, first class mail, postage prepaid, to defendant's counsel, Margaret M. Earnest, Trial Attorney, Tax Division, U.S. Department of Justice, 555 Fourth Street, N.W., Washington, D.C. 20001. July 28, 1995 Bruce L. Stern D.C. Bar No. 436231 FOOTNOTES /1/ A complete statement of facts is included in plaintiff's Memorandum of Points and Authorities in Support of Motion for Summary Judgment, filed with the Court on June 30, 1995, and which is incorporated herein by reference. /2/ Plaintiff does not know what, if any, particular Internal Revenue tax the assessment relates to, or whether the assessment was in the nature of a fine or penalty with no stated tax supporting the payment. /3/ See, Plaintiff's Statement of Undisputed Material Facts in Support of Motion for Summary Judgment, filed June 30, 1995, Material Fact No. 21. /4/ The term "return" means any "tax or information return, declaration of estimated tax, or claim for refund . . . which is filed with the Secretary by, on behalf of, or with respect to any person, and any amendment or supplement thereto, . . ." (IRC 6103(b)(1).) The term "return information" means, in part, "a taxpayer's identity, the nature, source or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether or not the taxpayer's return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense . . ." (26 U.S.C. 6103(b)(2)(A).) /5/ When, in 1969, it mandated exemption applications for new charities, and expanded public reporting by all exempt organizations, Congress opined: ". . . the House and the Finance Committee concluded that the past two decades indicates that more information is needed, on a more current basis for more organizations and that this information should be more readily available to the public, including state officials." (See, Tax Reform Act of 1969, S. Rep. 91-552, 91st Cong., 1st Sess., (1969), PAGE 44 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 p. 52 (on changes enlarging public reporting and disclosure laws affecting exempt organizations).) /6/ IRC 6104(a)(1)(A) provides in pertinent part: "If an organization described in section 501(c) or (d) is exempt from taxation under section 501(a) for any taxable year, the application filed by the organization with respect to which the Secretary made his determination that such organization was entitled to exemption under section 501(a), together with any papers submitted in support of such application, and any letter or other document issued by the Internal Revenue Service with respect to such application shall be open to public inspection at the National Office of the Internal Revenue Service." IRC 6104(b) further provides in pertinent part: "[Annual information returns] shall be made available to the public at such times and places as the Secretary shall prescribe." See also, IRC 6104(e)(1), requiring exempt organizations to allow public inspection of their exemption applications (and related papers) and annual information returns at their principal places of business. /7/ See, Revenue Act of 1950, S. Rpt. No. 2375, 81st Cong. 2d Sess. (1950), reprinted in, 1950 U.S. Code & Cong. 3053, at 3087 (discussing adoption of former IRC 153 requiring filing and disclosure of exempt organization annual information returns). See also, Technical Amendments Act of 1958, S. Rpt. No. 1983, 85th Cong. 2d Sess. (1958), reprinted in, 1958 U.S. Code & Cong. 4791, at 4884 (discussing adoption of IRC 6104(a)(1)(A) requiring disclosure of exemption applications and supporting materials) ("Your committee agrees with the House that making these applications available to the public will provide substantial additional aid to the Internal Revenue Service in determining whether organizations are actually operating in the manner in which they have stated in their applications for exemption.").) /8/ The Internal Revenue Manual ("IRM") further provides: "The intent of Congress in allowing for the public inspection of the information governed by IRC 6104(a)(b) and (e) was to enable the public to scrutinize the activities of tax-exempt organizations and trusts. Congress intended that these organizations and trusts be subject to a certain degree of public accountability in view of their privileged tax status and because the public has a right to know for what purposes their contributions are being or will be used." (IRM -- Administration, Disclosure of Official Information Return Handbook, Chapter 910(7).) /9/ See, IRS Form 990 (attached as Exhibit "A" to the Declaration of Thomas F. Field, filed June 30, 1995) and IRS Form 1023 (attached as Exhibit "A" to Declaration of Bruce L. Stern, filed June 30, 1995). These forms, which are subject to public inspection, require exempt organizations to disclose "return information". /10/ In its Brief, the IRS argues that plaintiff contends that ALL documents relating to exempt organizations collected at any time, for any purpose, and outside the application (or re-application) process are subject to public disclosure, including documents relating to whether the organization is liable for any tax, penalty, interest or fine or whether it is, or will be, under examination by the Service. (See, Brief, pp. 15 (fn. 3), 20.) This, however, is not plaintiff's position. Plaintiff only contends that the information and materials described in IRC 6104, and which are part of the exemption application process, must be made available by IRS for public inspection and the Service's statements to the contrary mischaracterize and exaggerate plaintiff's PAGE 45 (c) 1995, Tax Analysts, Tax Notes Today, AUGUST 31, 1995 position. /11/ This form transmittal letter states: "Dear [Taxpayer]: The Assistant Commissioner (EP/EO) of the Internal Revenue Service approved your closing agreement on the date shown above. I have enclosed the signed duplicate of the agreement for your records. Thank you for your cooperation. Very truly yours, [IRS Signatory]." /12/ In its Brief, the IRS asserts that for purposes of IRC 6104, the term "issued" "contemplates that the Service is the only party in control of when a document is issued." (Brief, p. 20.) This quizzical assertion, however, is not supported by the plain language of the statute nor the applicable regulations. In addition, even if this hypothetical standard did in fact set forth the applicable law, it would be satisfied in this case since the IRS is the only party which controls when a fully-executed closing agreement is "issued" (i.e., mailed to the taxpayer to which it pertains). /13/ In its Brief, the IRS states: "None of the closing agreements deals EXCLUSIVELY with an application by an exempt organization for recognition of its exempt status by the Service." (Id.) (Emphasis added.) /14/ A limited exception to this rule allows the IRS to withhold from public inspection information submitted during the application process which relates to trade secrets, patents, processes, styles of work or information which would adversely affect national security. See, Reg. section 301.6104(a)-5. All other material submitted to the IRS during the application process must be available for public review. /15/ The letter at issue in Breuhaus was written in 1972. It is not clear from this decision whether the organization ever filed a successful exemption application with the Service. The requirement that IRC 501(c)(3) organizations had to file exemption applications was enacted in the Tax Reform Act of 1969 and organizations already enjoying exempt status prior to that date had no obligation to file. See, e.g., Rogovin, "Tax Exemption: Current Thinking Within the Service," 22nd Annual N.Y.U. Institute 945, 948 (1964) ("The [favorable] ruling is not [in 1964] a legal prerequisite to exemption under the Statute. The Service could no more make nonexempt an organization meeting all the requirements of Section 501(c)(3) than it could declare exempt one that does not."). END OF FOOTNOTES